Lowe's Companies Earnings: How Low Will Second-Half 2014 Go?


Source:  Lowe's Companies

Lowe's Companies (NYSE: LOW  )  reported its fiscal second-quarter results on August 20, 2014. Sales, same-store sales, net earnings, diluted earnings per share, and guidance all showed decent year-over-year gains, while the company expressed optimism. Lowe's even beat top- and bottom-line analyst estimates, but something about its outlook actually hints at unexpected weakness. Let's take a closer look and see what long term investors can learn from the release. 

Hammering out the results

At first glance, Lowe's delivered a solid quarter. Sales jumped 5.7% to $16.6 billion. Same-store sales popped 4.4%. Net earnings increased 10.4% to $1.04 billion while earnings per diluted share leaped to $1.04, an increase of 18.2%. The results were a notch higher than the $16.55 billion in sales and $1.02 in EPS that analysts were expecting.

CEO Robert A. Niblock credited two key things for the positive results. First, he stated, "We were able to recover most of the outdoor product sales missed in the first quarter due to unfavorable weather conditions." That's basically a spillover effect from purchases that simply got delayed. Second, Niblock said, "We believe home improvement spending will continue to progress in tandem with strengthening job and income growth."

The reason for the much larger jump in EPS of 18.2% when compared to net earnings of 10.4% was the ongoing stock buyback program, which included $1.1 billion this quarter alone and $0.9 billion in the first quarter. Stock buybacks serve to retire shares outstanding and thus raise EPS even higher than it would otherwise be.

Guidance gets a remodel

Niblock added, "Our year-to-date sales performance, together with our previous assumptions for the second half of 2014, result in a modest reduction to our sales outlook for the year." With the first-quarter report, Lowe's was expecting a 5% bump in total sales and a 4% rise in same-store sales for the full fiscal year ending January 30, 2015  Now Lowe's expects total sales and same-store sales of 4.5% and 3.5% respectively.

Lowe's kept the same diluted earnings per share outlook of $2.63, but that could be simply in part due to more aggressive stock buybacks that serve to successfully manage the earnings outlook. The fact that Lowe's beat estimates for the quarter yet lowered guidance in total for the year suggests a somewhat disappointing second half unless the company simply decided to be more conservative with its numbers.

Meanwhile, Home Depot (NYSE: HD  ) reported its fiscal second-quarter results yesterday. Like Lowe's, Home Depot reported strong results that beat estimates and cited the "spring seasonal business" rebound as the reason. But unlike Lowe's, Home Depot didn't lower its guidance for the full fiscal year.

Was there something a hick-up that was unique to Lowe's and not Home Depot?  Cited in the May 21 earnings report, Lowe's saw performance improving due to "strengthening execution."  Nothing jumped out, at me at least, in the earnings release or the conference call to explain why guidance was lowered. 

Bottom line
Is a half of a percent drop in sales growth expectations a big deal for one quarter?  By itself, probably not, but it should raise a bit of an eyebrow as something to look out for just in case it's the start of a trend.  Sometimes the lack of a clear explanation by a company can be more concerning than the admission of a problem. Stay tuned because this show isn't over. 

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9/30/2014 4:05 PM
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